Equity Crowdfunding: What Happens after The Deal Is Done?

Although equity crowdfunding is still a relatively new financing tool for entrepreneurs, much has been written about the process. But what happens after the fundraising is done? While more hard work lies ahead for the entrepreneur, there are a number of ways to ease the transition into the next phase of a company’s life cycle.

Securities Filings

Like all other sales of securities, equity crowdfunding offerings must comply with state and federal securities laws. Equity crowdfunding offerings rely on one or more exemptions for private offerings, and some exemptions require the company to make filings after the offering begins.

For example, the most widely used exemption, Rule 506 under Regulation D, requires that the company file a Form D with the Securities Exchange Commission within 15 days after the first sale. Some states may also require a Form D or similar notice filing.

Whatever the case, it is important to ensure that all required securities filings are made timely and accurately. Failure to do so can, in extreme cases, limit the ability to rely on those exemptions in the future.

Accountability and Fiduciary Duties

The management team and board of directors must understand that they have fiduciary duties to the shareholders of the company. Often, when companies raise money via equity crowdfunding, that money is the first “outside money” invested in the business. At that point, no longer are the founders accountable only to themselves. Officers and directors have serious fiduciary duties of care and loyalty, and failure to heed those duties can lead to significant personal liability.

In addition to these fiduciary duties, officers and directors should feel a heightened sense of accountability since someone else’s money is now also at risk. Shareholders have a right to expect officers and directors to act as responsible stewards of their money, and if they are concerned about this, expect to receive questions and feedback to that end.

Transparency and Communications

Transparency is a key investor relations tool for proactively addressing these sorts of concerns. Many early-stage companies publish a private newsletter to investors to regularly update them on the company’s progress, and to discuss challenges and setbacks and how the company is solving them. A savvy investor reasonably expects that the company will hit road bumps along the way, but how the company’s leadership handles them defines their relationship with investors. Honesty and transparency about any challenges and proactively addressing solutions are the best ways to inspire confidence in the company’s management of their investment. Furthermore, an investor may bring a unique perspective or beneficial relationship that may provide an otherwise-unknown opportunity to solve a challenging issue.

Some companies also provide regular financial statements to their investors along with an annual update to the company’s capitalization table, and may make periodic requests for warm introductions that the company is seeking. What form it takes and what information is included will vary from company to company, but the important takeaway is that a regular and honest flow of information to investors can be an important tool for managing investor relationships.

Good Housekeeping

Ensure that capitalization table and shareholder information records are kept current at all times. Crowdfunded companies may have a little more work to do than other companies, because they may have larger numbers of small investors to manage. Even then, this recordkeeping is very easy to do if performed as a matter of course each and every time something changes. On the other hand, falling behind even a little can lead to a mess down the road, and that can lead to some uncomfortable problems, and even additional legal and accounting expenses down the road.

Similarly, periodically reach out to the crowdfunding investors to confirm that their contact information is current. Chasing down a lot of signatures in order to close a later transaction is painful enough without the added hassle of trying to track down shareholders whose contact information is no longer current.

Lastly, remember that equity crowdfunding investors are no different from other investors in one important way. If you build a great company, everyone will be happy!

About Chris Sloan

Chris Sloan leads the Emerging Companies Group at Baker Donelson (Nashville, Tenn.), where he is a shareholder, focused on startups and other emerging businesses. He counsels early-stage, high-growth companies with business planning and formation, venture capital funding, drafting and negotiating vendor and customer agreements, strategic contact negotiations, mergers and acquisitions, intellectual property protection, and other general business law and IP law issues. He often serves as outside general counsel for these companies, and ushers them into the next phases of their businesses. Sloan may be reached at (615) 726-5783 or by email at csloan@bakerdonelson.com.He may be followed on Twitter @casloan.

Comments

Thanks for the great advice. The company I work for is looking at doing some crowdfunding. I really like how you said you have to remember that you are now liable to the investors. This will be a big change for the owner. She is not used to reporting to anyone but herself. I will pass this info on to her.

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